Business History

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Financing firms: Beyond the dichotomy between

banks and markets

José L. García-Ruiz & Michelangelo Vasta

To cite this article: José L. García-Ruiz & Michelangelo Vasta (2021) Financing firms:
Beyond the dichotomy between banks and markets, Business History, 63:6, 877-891, DOI:
10.1080/00076791.2020.1767600

To link to this article: https://doi.org/10.1080/00076791.2020.1767600

Published online: 02 Aug 2021.

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Business History
2021, VOL. 63, NO. 6, 877–891
https://doi.org/10.1080/00076791.2020.1767600

Financing firms: Beyond the dichotomy between banks

and markets
José L. García-Ruiza and Michelangelo Vastab
Department of Applied Economics and Economic History, Complutense University of Madrid, Madrid, Spain;
a

Department of Economics and Statistics, University of Siena, Siena, Italy

b

ABSTRACT KEYWORDS
This article provides a review of the different streams of literature that Bank-industry relationship;
have contributed, since the seminal work by Alexander Gerschenkron, stock market-industry
to the issue on firms’ financing. We show that, although the traditional relationship; bank-based
dichotomy between bank and stock market is out of date, the financial systems;
market-based financial
Gerschenkronian thesis is still debated. We find that many microeco-
systems; interlocking
nomic issues have yet to be explored. In particular, the interaction directorates
between bank and stock market in financing firms merits further atten-
tion. Finally, we show that the combinations of several approaches and
the use of new techniques, such as the network analysis, can contribute
to provide further results on this topic.

Financial systems are nowadays largely acknowledged to be a crucial element in determining

economic growth. In modern economies, they play a key role by mobilising savings, pricing
risks and allocating capital to firms. The two main components of financial systems are
financial institutions and financial markets. Financial institutions, being mainly different kinds
of banks but also insurances, act as intermediaries by channelling resources from the sup-
pliers of funds to the users. Conversely, financial markets allow buyers and sellers of securities
to trade directly.
Following a consolidated taxonomy focussing on the historical perspective, countries
have been conventionally divided in bank-oriented (Continental Europe countries and Japan)
and in market-oriented systems (Anglo-Saxon countries). In the former, financial institutions
that bear risks and lend resources through close relationship with their clients prevails. In
the latter, savings are mainly channelling through markets, where equity and debt securities
are traded. One of the most important issues in the functioning of the financial systems is
how resources are allocated to industrial firms. The way in which firms are financed affects
many elements of a country such as the industrial structure, its specialisation, the corporate
governance and, ultimately, the pace of economic growth.
Traditionally, the historical literature has mainly focussed on the role played by banks
following the seminal contribution by Alexander Gerschenkron (1962). Indeed, in his very
influential essay Economic Backwardness in Historical Perspective, Gerschenkron maintained
that banks, particularly the long term financing universal ones, are the major drivers of
industrial spurts of latecomer countries, such as Germany and Italy, in the pre-World War I

CONTACT Michelangelo Vasta michelangelo.vasta@unisi.it

© 2021 Informa UK Limited, trading as Taylor & Francis Group
878 J. L. GARCÍA-RUIZ AND M. VASTA

years. In his view, this typology of banks functioned as a ‘substitutive factor’ for otherwise
missing prerequisites of industrialisation, i.e., the substantial capital accumulation and the
willingness to invest it in the industries related to the technologies of the Second Industrial
Revolution. The creation of a bank system to stabilise the currency and, particularly, to pro-
vide capital to business has been still considered by Robert Allen in his recent survey of
global economic history, as one of the pillars of the ‘standard model’ of industrialisation
adopted by the Western countries (Allen, 2011).1 In his model, Allen has acknowledged the
crucial role played by the investment banks, which did not have a role in British industriali-
sation, in Continental Europe, especially in Germany.
Indeed, the nexus between banks and the successful catching up of the German econ-
omy during the Second Industrial Revolution is a classical topic in economic history. The
idea of a positive impact of large German joint stock credit banks dates back to the tradi-
tional contribution by Otto Jeidels in 1905 and Rudolf Hilferding in 1910, but has been
systematised by Gerschenkron in 1962 in his original model of ‘conditional convergence’
based on the adoption of new technologies of latecomer countries (Hilferding, 1910; Jeidels
1905). According to Gerschenkron, the German investment banks are a so crucial invention
to be comparable to that of the steam engine.
The main idea of the Gerschenkron thesis has been analysed by several empirical
researches not only mainly focussed on the German case. In his influential book Scale and
Scope, Alfred Chandler gave support to the Gerschenkronian thesis suggesting that German
universal banks provided capital for new industries and contributed to guide industrial firms
in the initial stage of their growth (Chandler, 1990). In the same vein, Jürgen Kocka main-
tained that the joint stock companies, closely linked with the universal banks, played a major
role in the big rise of the German industry (Kocka, 1978). The combination of joint stock
companies and the investment banks would have provided savings to the new industrial
investment necessary for the sectors of the Second Industrial Revolution.

1. Gerschenkron hypothesis is still alive?

The Gerschenkronian thesis on the crucial role of the universal banks has been reviewed
and tested by many contributions. Jeremy Edwards and Sheilagh Ogilvie found that the
claim that universal banks played a crucial role in German industrialisation is not confirmed
for at least three reasons (Edwards & Ogilvie, 1996). First, universal banks accounted for a
small proportion of the total assets of financial institutions before World War I. Second, they
did not support the increase in concentration in German industry. Third, their contribution
to coordinate the system exploiting the information flows they got via supervisory boards
was over evaluated. Finally, they claim that other type of banks (savings banks, mortgage
banks, and credit cooperatives) were also important for financing the German industrial
system. Successively, in a series of empirical research, Caroline Fohlin found evidence that
universal banks had a limited impact on capital mobilisation, industrial investment, and
economic growth since firms connected to universal banks performed similarly to ‘unat-
tached’ ones (Fohlin, 1999a). Carsten Burhop, in an empirical exercise, provided a nuanced
view of the Gershenkronian thesis, by suggesting that the universal banks played an import-
ant role in the early phases of German industrialisation (1851–1882), while their role faded
away later on (Burhop, 2006).
 BUSINESS HISTORy 879

The Gerschenkronian hypothesis has been largely tested also for other countries
(Cameron, 1967, 1972).2 It is not possible to mention all the related studies in this context,
but two cases are worth noting. The first refers to Italy, a country directly analysed
by Gerschenkron in 1962. Fohlin showed formalised relationships with universal banks
had limited impact on firms’ investment, while Michelangelo Vasta, Carlo Drago, Roberto
Ricciuti and Alberto Rinaldi reconsidering the centrality of the universal banks suggested
that also local banks played a role in funding new industries (Fohlin, 1998, 1999b;
Vasta et  al., 2017). The second concerns the United States, the country which shares
with Germany, great success during the rise of the Second Industrial Revolution. In a
kind of counterfactual exercise, Charles Calomiris found that, at the turn of the
twentieth century, American firms paid more for financing their investment than German
firms, and attributed this gap to the lack of universal banks in the United States
(Calomiris, 1995).
Although, the Gerschenkronian thesis dates back more than half century, it continues
to be tested also by following the new theoretical approaches developed by the eco-
nomic literature. However, the first criticism of the Gerschenkronian thesis came, at least
implicitly, from Raymond Goldsmith in his seminal contribution Finance Structure and
Development (Goldsmith, 1969).3 In his quantitative survey, Goldsmith provided a large
amount of data on the historical evolution of financial systems in a large sample of
countries, developed and less developed. Although the work is by and large a vast
collection of data, it casts doubts about the critical role played by banks and emphasised
the crucial contribution of markets in financing of industrial firms and in determining
economic growth.
Since the Goldsmith contribution, a growing stream of literature has emphasised, both
theoretically and with a series of empirical studies, the great importance of financial markets
for economic growth (Allen & Gale, 2000; Demirgüç-Kunt & Maksimovic, 2002; King & Levine,
1993). All these contributions generated a large amount of literature which overcame the
traditional dichotomy between bank-oriented vs market-oriented financial system by
emphasising that banks and markets must be seen as complementary rather than substitutes
in financing industrial firms. In the same context, it has been highlighted that both, bank
and markets, have an empirical connection with long run growth rates (Allen & Gale, 2000;
Boot & Thakor, 2010; Levine & Zervos, 1998).
Following this stream of literature, new research offered further analysis of the
Gerschenkron hypothesis. Fohlin provided new insights into the structure of the German
financial system (Fohlin, 2007). Her results showed that key characteristics of universal
banking emerged late in the industrialisation process and their influence came from
something other than the formalised control relationship over firms. The importance of
universality—the combination of investment and commercial banking—appears mostly
in the support that universal banks gave to the development of active securities markets,
not in the domination of industry nor in the dramatic alteration of firm behaviour or
performance. In a recent study, Sibylle Lehmann, acknowledging the importance of the
large universal German banks, modified the Gerschenkronian hypothesis by showing
that these banks played an important role in fostering the development of the stock
market, which increasingly replaced loans as a major source of capital for industrial firms
(Lehmann, 2014).
880 J. L. GARCÍA-RUIZ AND M. VASTA

2. Bank-based vs market-based financial systems?

Following the stream of theoretical and empirical literature which has been developed since
the late 1990s, Fohlin provided a reappraisal of the dichotomy bank-based vs market-based
by adopting a historical perspective (Fohlin, 2012, 2016). She showed most financial systems
have a mix of characteristics and do not fit into a clear-cut taxonomy. In a nutshell, she
suggested that the historical perspective helps to understand that a well-functioning finan-
cial system is crucial for economic growth, beyond the specific type it has developed.
Although some scholars continued to maintain the peculiarities of the firms’ financing
patterns in the two systems, the dichotomy between bank-based and market-based financial
systems seems to be overcome (Lescure, 2007).4 Indeed, many studies have tried to under-
stand the determinants of the structure of financial systems. For instance, the crucial role
played by the legal origin in determining the level of financial development of different
countries has been highlighted, in some seminal contributions, by Rafael La Porta, Florencio
Lopez-de-Silanes, Andrei Shleifer and Robert Vishny (La Porta et  al., 1997, 1998).5 This
approach, labelled as ‘Law and Finance’, maintained that the efficiency of the legal system
is positively related to economic growth via financial development. In a nutshell, they sug-
gested that countries with a civil law system (France, Germany, Italy, etc.) have both a weak
investor protection and least developed capital markets. In contrast, common law countries
(United Kingdom and United States) have led to market-oriented financial systems.
Furthermore, they also reconsidered the dichotomy of bank-based vs market-based systems
arguing that it is the financial development and not the financial structure which are crucial
for supporting firms’ investments. In contrast with this hypothesis, Raghuram Rajan and
Luigi Zingales, by adopting a comparative perspective, maintained that the driving force of
the development of financial institutions is the political context. Indeed, they showed that,
at the eve of World War I, the most developed countries had similar levels of financial devel-
opment, regardless of the legal system they have (Rajan & Zingales, 2003).
The Law and Finance approach has been tested and discussed even in further contributions
which have adopted a historical perspective. Most of the various works have not found much
evidence in support of this hypothesis. For instance, Timothy Guinnane, Ron Harris, Naomi
Lamoreaux and Jean-Laurent Rosenthal challenged the idea that the Anglo-Saxon common law
is supporting economic growth more strongly than the civil law systems diffused in Continental
Europe (Guinnane et al., 2007). Within the business history, a recent issue of this journal has tackled
the topic of the effectiveness of the Law and Finance hypothesis. These contributions have empha-
sised that legal origins do not matter that much in driving the financial development of a country.6
Furthermore, in a recent contribution, Christopher Coyle, Aldo Musacchio and John Turner, looking
at the capital market in the United Kingdom (the home of common law), in the early twentieth
century, showed that both the size of the UK domestic capital market is not correlated with the
investor protection laws and that UK legislation was so not different in comparison with those of
the civil law countries (Coyle et al. 2019). Thus, they maintained that the divergence, if any, of the
two different systems does not have its roots in the period before the World War I.

3. New approaches to the analysis of the financial systems

In recent times, many works have highlighted the complexity and the rich variety of the
institutional set up of the financial systems which, to provide resource to industrial firms,
 BUSINESS HISTORy 881

have shown a vast heterogeneity of forms involving a plurality of actors. The growing interest
in the analysis of the structure of financial systems and their determinants in economics
have thus relaunched interest in the historical perspective.7
The field of the history of financial systems and, particularly, on the financing of indus-
trial firms is nowadays characterised by a mix of epistemological approach and research
subject (Colvin, 2017). It is not easy to provide an exhaustive survey of all studies in this
field, but it is possible to emphasise the main general trends. First of all, it seems rather
clear that both business historians and economic historians continue to contribute to
the field, although, in recent times, business historians seem to be more active.8 Second,
most of the studies are still largely concentrated on the major European countries and
on the United States, even if in the last few years some research has focussed on other
cases. Third, if the economic historians use the nowadays traditional quantitative tech-
niques, also in the field of business history these techniques are more diffused than in
the past (de Jong et al. 2015; Eloranta et al., 2010). Indeed, in recent years, the network
analysis has spread in business history and its use seems to be particularly concentrated
in the reconstruction of corporate networks and in the relationships between industrial
firms with banks and financial companies. Indeed, a stream of research focussing on
corporate networks has used the network analysis to look at the dense relationship
between different actors providing a detailed description of the structure of the corporate
system.9 Some works have investigated the structure of the national networks for different
countries such as Germany (Fohlin, 1997, 1999a; Windolf, 2014), United Kingdom (Schnyder
& Wilson, 2014), Italy (Rinaldi & Vasta, 2005, 2012; Vasta & Baccini, 1997; Vasta et al., 2017),
Switzerland (Ginalski et al. 2014), Belgium (Deloof et al., 2010), Japan (Okazaki et al., 2005)
and United States (Frydman & Hilt, 2017) for different periods. In all these works, the
crucial role played by banks (but also financial companies) in monitoring and financing
industrial firms is analysed in detail. In the same vein, other studies have investigated
interlocking directorship, by adopting a qualitative approach, for single cases. For
instance, the Rotterdamsche Bankvereeninging in the Netherlands and the J.P. Morgan
in US (Colvin, 2014; Pak, 2013).

4. The content of this special issue

This special issue aims to contribute, by using different approaches, to the issue on how
firms, particularly industrial ones, have been funded in different historical periods. The main
aim is to look at the financial system as a whole, focussing on both financial institutions and
financial markets and, particularly, on their interactions. The selected articles, although lim-
ited to Western-European case studies, contribute to that goal.
For the First Industrial Revolution, Stefano Ugolini focuses on the financing of the take-off
of industry in Belgium, the first country to follow the path pioneered by Great Britain in the
mid eighteenth century. Belgium’s independence was recognised by the London Conference
of 1830, although the decision was not accepted by the Dutch until 1839. Ugolini’s article
analyses that decade and demonstrates how financial markets and institutions worked
together to consolidate the new country’s economy. Far from having a conflictive relation-
ship, the stock market and banks found a way to ‘co-evolve’, both for their mutual benefit
and for that of the national economy.
882 J. L. GARCÍA-RUIZ AND M. VASTA

The author investigates this co-evolution based on information provided by two data-
bases: his own dataset and the SCOB Database. The starting point was an underdeveloped
financial system, where the Société Générale (SG) (1822) played a prominent role. The SG
was soon joined by the Banque de Belgique (BdB) (1835). Both were entities with strong
state intervention. Ugolini illustrates the critical role played by the banking industry in the
Belgian industrial take-off. SG and BdB acted as universal banks and did not hesitate to
purchase a significant quantity of shares of the innovative companies that contributed to
spread the Industrial Revolution to the Continent.
In a second phase, the banks then helped those companies to list on the Brussels Stock
Exchange and proceeded to act as ‘market makers’ at all times. Thus, in Belgium, there was
no conflict whatsoever between the banks and the stock exchange. In contrast, the banks
viewed the Brussels Stock Exchange as an additional financial instrument. The 1839 crisis,
which came about as a result of the final conflict with Netherlands, had a disastrous effect
on BdB, which had to be rescued and converted into a commercial bank. However, SG and
other banks continued to serve as universal banks without preventing Brussels from becom-
ing an important international financial hub.
This special issue addresses the Second Industrial Revolution with a study undertaken
by Emilie Bonhoure and David Le Bris. The study looks at the role played by the stock
exchanges in France. Although the leaders of the Second Industrial Revolution were Germany
and the United States, France also played a significant role, notably, for example, with its
automobile industry, which continues to enjoy success today. The research question posed
by Bonhoure and Le Bris is whether the Paris stock exchanges provided sufficient support
to the successful firms that appeared during the Second Industrial Revolution. These firms
were emerging businesses and, therefore, often lacked information. If the answer is yes,
according to the authors, one might identify high Tobin’s Q ratios even if dividends
were meagre.
The authors work with their own database of around a thousand companies that, in 1907,
were listed on the Paris stock exchanges (both the Parquet official exchange and the non-reg-
ulated Coulisse), as well as information provided by the new Data for Financial History
Equipment of Excellence (DFIH Equipex). According to their findings, Second Industrial
Revolution companies accounted for 9% of total market capitalisation in 1907 and 27% in
1929, so they had tripled their share. These data indicate that France’s industrial efforts in
new and upcoming sectors were well supported by the country’s stock exchanges. The
authors believe that in 1907 the trajectories of the Second Industrial Revolution had only
just arrived on French shores. Funding during the first stage of the revolution would have
primarily been provided by banks; however, in early twentieth-century the stock markets
began to take centre stage in the United States, although much less so in Germany. France
would follow the American model.
When comparing the sectors of the Second Industrial Revolution with others, Bonhoure and
Le Bris found significant differences between Tobin’s Q, which was higher for Second-Industrial-
Revolution companies, and the dividend yield, which was somewhat lower for those same com-
panies. The regression analyses of both variables controlling risk, liquidity, governance, and
nationality only point towards a connection between the Second Industrial Revolution and Tobin’s
Q. Because Tobin’s Q is a more definitive variable than dividend yield, the authors conclude that,
despite information asymmetries, the French financial markets were indeed able to recognise
the potential of some of the emerging companies that were poised to change the world.
 BUSINESS HISTORy 883

With regard to Britain, the relationships between financial system and industrialisation
have always been viewed critically. The qualitative study undertaken by Mark Billings, Simon
Mollan, and Philip Garnet uses the work of the Colwyn Committee to review the state of that
relationship at a crucial moment in time: the end of World War I in 1918. This was a banking
system where the universal banking is not working, preferring to deal with customers
through credit. According to the figures, the banks extended credit abundantly, but with
significant aversion to doing so on a long-term basis. In any case, in the British financial
system, the markets tended (and tend) to dominate the institutions. The British saw the
commercial banks, the merchant banks, and the stock exchanges as completely disconnected
from the industrialisation process. The problem became more serious with the advent of
the Second Industrial Revolution, when the need for capital was clearly greater than in
the First.
The Colwyn Committee, chaired by the entrepreneur and banker Lord Colwyn, was con-
vened by the British Treasury to investigate the process of bank concentration which had
led to the excessive weight of the well-known ‘Big Five’ in the City of London (Barclays, Lloyds,
Midland, National Provincial, and Westminster). The committee was made up of 12 mem-
bers—among them, the governor of the Bank of England—and compiled 280 pages of
information obtained from 22 witnesses. The committee members and witnesses included
many bankers, including representatives of the ‘Big Five’, except Barclays. For this reason, the
Colwyn Committee report is often blamed for partiality and, according to the authors of the
article, has not been received proper consideration.
In reality, the work of the Colwyn Committee constituted a vital step in the British banking
industry’s journey towards accepting regulation and supervision. The Committee had heated
debates on issues that continue to be relevant, such as the rationality of using mergers as
an expansion strategy, the need to have large institutions to compete with those in other
countries (the United States or Germany), the structural weakness of local banks and their
failure to capture savings in regions with surplus and invest it in regions with deficit, the
debatable effect of mergers on competition (would a handful of entities be enough to main-
tain a sufficient level of competition?), the advantages and disadvantages of nationalising
banks (which the Labour Party was proposing), the role of regulation now that liberal capi-
talism had come to an end (there was only agreement on promoting transparency), the
desirability of reinforcing capital ratios, and the possibility of moving towards German-style
universal banking as a mechanism for supporting industry more effectively.
The work of the Colwyn Committee may not have resulted in legal changes, but the
authors of the article suggest it did bring about a more tentative approach towards bank
mergers and greater acceptance of an increased degree of regulation. Far fewer mergers
took place between 1924 and 1987 than between 1810 and 1924. The number increased
again at the turn of the twenty-first century.
The trajectory of the British banking industry after World War II is addressed by an article
written by Philipp Kern and Gerhard Schnyder. The authors claim that a fundamental issue
in the relationship between financial institutions and companies is the power created by
interlocking directorates, i.e., the coordinated actions made possible by common director-
ships. In a specialised banking system, such as the British in 1918, there was no place for
interlocking directorates. As Sir Edward Holden, the Chairman of Midland Bank, stated forth-
rightly before the Colwyn Committee: ‘Interlocking directors are unknown in our banking
world’ (see article by Billings, Mollan and Garnett in this issue). However, during the
884 J. L. GARCÍA-RUIZ AND M. VASTA

1950–2010 period analysed by Kern and Schnyder, things had changed in line with the
British bank’s move towards universal banking. This move was broadly backed by the political
authorities.
The ambitious approach by Kern and Schnyder attempts not only to identify British inter-
locking directorates and their evolution over time but also their influence on levels of cor-
porate debt. They use an own dataset that includes information on the 50 largest financial
companies and the 200 largest non-financial companies, in eight benchmark years (1950,
1958, 1976, 1983, 1993, 1997, 2003 and 2010). The theory identifies different reasons why
bankers would want to be on the boards of companies, and why companies would want to
be on the boards of banks. The authors suggest three hypotheses: (1) debt levels are greater
in companies with more connections to financial institutions; (2) the debt level of a company
increases if those connections occur throughout the company network; and (3) the influence
of those connections on debt levels was greater before the stock market reforms of 1986—
the ‘Big Bang’—than afterwards.
Before World War II, the British financial system kept aside from universal banking because
this was seen as a formula to keep funds inside the borders and a way to accelerate growth
in countries lagging in industrialisation. The war changed everything. By the end of the
1940s, 90% of the stocks listed in the London Stock Exchange were domestic, compared to
just 8% in 1913. The financial system concentrated its interest in the national economy and,
between 1945 and 1979, banks reinforced their commitment to British industry by adopting
universal banking practices. Everything changed again in 1979, when the Conservative leader
Margaret Thatcher introduced a neoliberal program which, among other things, was intended
to boost the London Stock Exchange. This was achieved by a package of measures introduced
in 1986 known as the ‘Big Bang’. In line with these reforms, deposit and merchant banks
merged their activities to give birth to a new type of universal banking that focussed on
globalisation and had little concern for domestic industry.
The interlocking directorates are subjected to network analysis in order to understand
the resulting maps for each year and a regression analysis was conducted to test the three
hypotheses on debt levels. It should be noted that the authors refer to financial institutions
in the broadest sense of the term, with banks constituting 56% of the sample in 1950 but
only 14% in 2010, and that debt is assumed to be anything that is not capital or self-financing.
The results suggest that there was increasing integration between 1950 and 1976, with
banks occupying a central role. This was in line with the proposed hypotheses. Since the late
1970s, the ties have loosened and financial institutions have lost centrality, which in turn,
has brought about a change in the way companies are financed. The article ends by pointing
out that, overall, the traditional view of the British financial system is upheld, because the
links identified were weak, their impact on financing only lasted for a short period and
industrial companies continued to have difficulties in obtaining long-term funding through-
out. The networks that existed before Thatcher were due more to regulatory pressures than
to the will of the financial institutions.
The last article in this special issue focuses on financing for small and medium-sized
industrial firms. These were particularly significant in economies such as Italy’s, which was
analysed by Alberto Rinaldi and Anna Spadavecchia. The authors concentrate on the period
1913–1936, when universal banking still existed in Italy. In 1936, following the financial crisis
that provoked a large state intervention in industry and in its funding channels, a new law
prohibited universal banking. The analysis is based on interlocking directorates with
 BUSINESS HISTORy 885

information obtained from Imita.db (http://imitadb.unisi.it), the database on Italian joint

stock companies. The research intends to further test the Gerschenkron hypothesis, which
gave all the credit for the Italian industrial take-off to the large German-style universal banks
and the large companies.
The largest nation-wide five universal banks are studied separately with the 20 most
prominent local banks in three benchmark years (1913, 1927, and 1936). The common
denominator is that they all have links to the more industrialised regions of Italy, in particular,
Lombardy, which had more dealings with local banks. The larger banks tended to extend
their reach throughout the country. The Great Depression would end up seriously affecting
the large banks, and Banca Commerciale, Credito Italiano, and Banco di Roma had to be
rescued by the Istituto per la Ricostruzione Industriale (IRI), while the local banks remained
largely independent of the bigger banks throughout.
The interlocking directorates indicate a correlation in size: the large companies tended
to work with the big banks and smaller companies preferred the smaller local banks. It was
also the case that emerging companies began their financial dealings with local banks and
then moved them to the larger banks. It seems, therefore, that local banks were less averse
to risk and would have played a significant role in the country’s industrial take-off, although
this role seems to be mainly concentrated in the light sectors.
Importantly, the article also addresses the direction of causality in the interlocks. Based
on the theory that the more powerful exerts an influence on the less powerful, it examines
who would have been more important in the interlock relationship. If the bank influences
the company, the relationship is described as ‘outdegree’, but if the company exerts influence
on the bank, it is an ‘indegree’ relationship. By calculating the outdegree/indegree ratio one
can deduce the directionality of a set of relationships. The results obtained are inconclusive,
leading the authors to believe that in Italy the bank-industry relationship was one of mutual
dependence, or leaned slightly towards industry exerting influence over the banks, but that
in no case was industry completely subjected to the power of the banks as has sometimes
been assumed. It could even be suggested that the problems experienced by the banking
industry in the 1930s came as a result of pressure exerted by industry. In this sense, there
were few similarities between the Italian situation and that of Germany or the United States.
The article concludes with two case studies: Banca Lombarda (1870) and Banca di Legnano
(1887), two leading local banks. The interlocks they had reveal that both banks had a lot of
involvement in the development of the textile and silk industries, but they also had some
links with the sectors of the Second Industrial Revolution. For Rinaldi and Spadavecchia,
these cases confirm the two main conclusions of their article: (1) local banks played an
important role in supporting emerging firms in light-industry sectors; and (2) relationships
between banks and industry were not always dictated by a hierarchical system where the
banks held the most power. According to the authors, the Gerschenkron thesis is too simple
to be applied to the complex realities behind the industrial take-off in Italy.10

5. Conclusion and further development

In the long review of the book that Rondo Cameron dedicated to challenging the
Gerschenkron hypothesis, Raymond Goldsmith concluded that it was necessary to extend
the sample to include more countries, adopt a ‘common statistical framework’, analyse more
carefully the causal relationships and take ‘the study of the relationship on a microeconomic
886 J. L. GARCÍA-RUIZ AND M. VASTA

level, i.e., from the point of view, and on the basis of the records, of selected individual
financial institutions or of selected business firms’ (Goldsmith, 1973). In the almost half a
century that has elapsed since then, much progress has been mainly made in the macro-
economic aspects proposed by Goldsmith. The microeconomic issues have been analysed
deeply only in more recent times. This special issue follows this recent pattern by adopting
the more updated approaches developed within the business history.
From the theoretical point of view, it has been usual to distinguish between countries
with financial systems based on banks and financial systems based on markets and, more
recently, also between systems based on civil law (institutions) and systems based on com-
mon law (markets). It has even sought to contrast universal banking with specialised banking
and relational banking with fully competitive banking. Historical research has concluded
that ‘setting up banks and markets as opposites misses the fundamental complementarities
between them and ignores their complexity and heterogeneity’ (Fohlin, 2012, p. 151, 2016).
It also begins to become clear that financial systems do not trigger growth processes and
industrialisation, but they are essential to sustain them over time. Each society has the finan-
cial system that fits with its historical trajectory, without any being better or worse than
others. The important thing is to have a financial system sophisticated and stable and that
evolves according to the demand forces of the moment. History matters.
The analysis of the Belgian case in the 1830s diminishes the role of the banks in order to
stress the existence of a ‘co-evolution’ of banks and financial markets, even if the former were
essential in the take-off of the first country in Continental Europe that catched up the tra-
jectories of the First Industrial Revolution. For France in the early decades of the twentieth
century, an analysis with new sources also revalued the role of financial markets in the Second
Industrial Revolution. Both works contribute to a more balanced and nuanced image of the
role of the components of the financial system in the industrialisation process.11
The difficulty of joining the Second Industrial Revolution by Great Britain is found in the
reports of the Cowlyn Committee that met in 1918. The work of the Cowlyn Committee has
been neglected because it was not translated into legal measures, but a rereading of the
reports allows us to verify the frustration of British bankers in the face of the success of
universal banking in Germany and the United States (closely linked to the stock market in
this latter case and perhaps, as suggested by Sybille Lehmann (2014) even in the former)
and their willingness to consider greater regulation inevitable, which was what followed
the world wars of the twentieth century.
Finally, the modern network analysis, through interlocking directorates, proves its
effectiveness in both the British case, for 1950–2010, and the Italian case, for 1913–1936.
Ending a long tradition of pure commercial banking, British banks and companies were
integrated into networks during the Golden Age, where banks took centre stage. In truth,
it was a universal banking system forced by the authorities, which did not prevent the
continuation of the industrial decline and that jumped through the air with the neoliberal
revolution of Margaret Thatcher. In the Italian case, the study reveals the existence of
networks segregated by size (large banks with large companies and local banks with
small and medium-sized companies) and more complex than those derived from
Gerschenkron thesis.
This special issue has focussed on a variety of themes concerning the relationship between
financial systems in a broader sense and firms’ growth. However, many research topics remain
pending.
 BUSINESS HISTORy 887

If, as said, the traditional dichotomy between banking system and stock market seems
to be out of date, the interaction between these two elements seems to be under-researched.
Thus, many aspects related to the regulation, both of the banking system and of the stock
market, deserve to be further analysed. Indeed, financial regulation is a crucial element in
the selection process of firms’ investments. For instance, the existence of a self-regulation,
able to provide some oversight, seems to have played a positive role to reduce the IPO failure
even in the London stock exchange in the early 19th century (Burhop et al., 2014). We believe
that both qualitative and quantitative studies can contribute to increase our knowledge on
how regulation mechanisms have determined firms’ investments and, ultimately, eco-
nomic growth.
The second issue that merits much attention is related to the characteristics of the firms
to be financed. Most of the literature has concentrated its attention to the firms lato sensu
or, more often, to the archetypal firm associated to one single country. In our view, what
we need is to have more analysis that take into account the vast heterogeneity of firms in
different countries. First of all, as we have seen in this special issue, size matters. Thus, we
believe that more attention should be paid to the different conditions to access to capital
for firms of different size, also within the same country. Generally, small and medium-sized
companies have to settle for self-financing their projects or resorting to bank credit by
providing guarantees and compensation. In contrast, larger companies may face expensive
but wider access to capital markets. However, these differences are crucial in order to under-
stand whether there were factors that can favour (limit) firms’ growth capacity. Second, it
would be important to understand if sectoral and technological characteristics of the firms
can have determined, in different context, their capacity to be funded. In particular, we
would need to have more analysis—both as case studies on single firm and/or at more
aggregate level—able to explore the capacity for a country to foster firms that are close to
the technological frontier.
Last but not least, we would like to emphasise some methodological issues. First, much
of the analysis is still focussed on a small number of European countries. Our knowledge has
been often limited to the most successful countries, such as England or Germany, or to
countries for which some general hypothesis was developed by some seminal studies (e.g.
Gerschenkron for Italy). In this special issue, attention has been paid to Belgium and France,
but many efforts must be made in order to study several other countries in Europe and also
in other continents. Second, as showed in this special issue, the interaction between the
tools of the business historians and those of the economic historians can provide fruitful
results. If we still believe that qualitative sources can be used to validate theoretical and
empirical hypotheses, in the last years, the quantitative methodologies have been largely
used by business historians. In this perspective, network analysis seems to be one of the
more promising approaches to develop our knowledge on the relationship between financial
markets and industrial firms.

Notes
1. The other pillars of Allen's standard model are the creation of a ‘mass education’ system able to
speed the adoption of modern industrial technologies, the construction of a national transport
infrastructure for creating a large national market and an external tariff for protecting ‘infant’
industries.
888 J. L. GARCÍA-RUIZ AND M. VASTA

2. Cameron (1967) and Cameron (1972) were the first attempts to contrast the Gerschenkron’s
thesis. Cameron and his collaborators studied 12 national cases (Austria, Belgium, England,
France, Germany, Italy, Japan, Russia, Scotland, Serbia, Spain and the United States) with mixed
results.
3. In his book, Goldsmith quoted Gerschenkron only once in a footnote (p. 402).
4. Lescure is an example of maintaining the dichotomy.
5. See La Porta et al. (2008) for a survey.
6. See Musacchio and Turner (2013) for a survey of these contributions.
7. For two recent surveys respectively on banking history and on stock market history, see Colvin
(2014) and Smith and Tennent (2017).
8. However, it is worth noticing that, according to Cioni et al. (2020, Table 3), the studies on bank-
ing and financial systems have increased considerably their weight within the top five eco-
nomic history journals in the last twenty years.
9. For a comparative long run studies on this issue, see David and Westerhuis (2014).
10. The article by Rinaldi and Spadavecchia in this issue follows the line opened by Rinaldi and
Vasta (2005), which has inspired Rubio-Mondéjar and Garrués-Irurzun (2016). According to
these authors, the Spanish networks were mere examples of crony capitalism, which is at odds
with the Gerschenkronian interpretation of the role of the banks in the Spanish economic de-
velopment by Tortella and García-Ruiz (2013).
11. In a recent work, Heblich and Trew (2019) have investigated the role of banks in the spreading
of the Industrial Revolution in England since the early XIX century. They find that the presence
of banks in a given area accelerated the industrialization process.

Disclosure statement
No potential conflict of interest was reported by the authors.

ORCID
José Luis García Ruiz https//doi.org/0000-0002-3612-6217
Michelangelo Vasta https//doi.org/0000-0002-8683-8095

Notes on contributors
José L. García-Ruiz is Professor of Economic History at the Complutense University of Madrid
(Spain). His lines of research are Business History, Financial History and Industrial History, where
he has published articles and books. Between 2015 and 2019 he was the Editor-in-chief of
Investigaciones de Historia Económica-Economic History Research (IHE-EHR), the academic journal
of the Spanish Economic History Association.
Michelangelo Vasta is Professor of Economic History at the University of Siena (Italy). His main
fields of interest are: economics of innovation in the long run perspective, institutions and eco-
nomic performance, the economic history of living standard, entrepreneurship and trade. He
pays particular attention to historical dataset and quantitative methods. He has published
extensively in the major economic history and business history journals.

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